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Dr.

Katherine Sauer

A Citizens Guide to Economics

ECO 1040

Todays Overview I. II. III. IV. V. VI. What is economics? Economists as Scientists and Policy Advisers Intro to Thinking Like an Economist Course Syllabus Baseline Economic Knowledge Survey What did you learn today?

I. What is economics? Classic definition: Economics is the study of the use of scarce resources which have alternative uses. What do we mean by scarce? None of us can have as much as we want of all the things we want. - Justice Oliver Wendell Holmes Human desires exceed our resources.

Resources have alternate uses: ex: time money water your skills

Economics studies the consequences of the decisions that are made about the use of scarce resources. Decisions are made by individuals, firms, and governments.

Macroeconomics is the study of economy-wide phenomena. Microeconomics is the study of households and firms making decisions and interacting in markets.

Course Topics: The Basics: ~ How Markets Work ~ The Importance of Incentives ~ Information Economics Government: ~ The Role of a Good Government ~ Problems with Government ~ Voting and Special Interest Groups The Economy as a Whole: ~ Standard of Living ~ GDP, Inflation, Unemployment ~ Money and Banking ~ Finance International Economics: ~ Exchange Rates ~ International Trade ~ Development Economics

II. Economists as both Scientists and Policy Advisers A. Scientists Economists approach the study of the economy with scientific objectivity. - observe the world - devise theories and formulate hypotheses - collect data - test hypotheses

The economists lab is the world. - cant design experiments for the whole economy - can study the results of random events and policy changes The economy is a moving target. It is constantly changing and what was true in the past may not be true in the future. However, there are several key principles that can help you to understand the economy, even if you cant predict its future.

B. Policy Advisers When economists are trying to explain the world, they are scientists. When they are trying to help improve it, they are policy advisers. Why is unemployment higher for teenagers than for older workers? What should the government do to improve the economic well-being of teenagers?

How do economists affect policy? ~ Federal, State, and Local governments directly employ economists. ~ Some economists research and writings often affect policy indirectly. ~ Sometimes their advice is not taken. Making economic policy in a representative democracy is a messy process. - economic advice is only one part of the information considered by policymakers

III. Intro to the Economic Way of Thinking A. every action involves an opportunity cost Opportunity cost is whatever must be given up for the action. - time, money, resources, etc What is your opportunity cost of being in class today?

What is the opportunity cost of your college education?

What is the opportunity cost of using tax dollars to pay for national health care?

Economists say that there is no such thing as a free lunch. All of life is about trade offs and opportunity costs.

(Have you ever been asked out on a date and said no?)

B. recognize tradeoffs and potential unintended consequences {various viewpoints from affected parties} Because we live in a world with limited resources and unlimited wants, we will always face tradeoffs. - sometimes they are not obvious right away

An unintended consequence is an outcome that is not intended by a particular action. - usually referring to a policy or a law - the policy / law may have achieved its intended purpose and also some unintended consequences - the policy / law may not have achieved its intended purpose and only resulted in unintended consequences

C. incentives matter Incentives influence our decisions. If there is a change in the benefits or costs associated with an action, people are likely to change their behavior.

Ex: The estate tax expired on January 1, 2010. There were many reports of people hanging on until 2009 ended. {Rich Cling to Life to Beat Tax Man December 20th , 2009 -WSJ}

D. marginal analysis Weigh the additional benefits against the additional costs. You are at your usual Friday night party. It is now 11pm. What factors into your decision to stay or leave? You are still at the party and it is now 2am. What factors into your decision to stay for another hour?

Summary: Economics is about the consequences of the decisions that are made about the use of scarce resources. Economists sometimes act like scientists and sometimes like policy advisers. Economists think about the world in terms of opportunity costs, unintended consequences, incentives, and incremental decisions.

IV. Course Syllabus V. Baseline Economic Knowledge Survey VI. What did you learn today? Please explain 2 concepts that you learned today.